Minnesota’s labor market faces an uneven recovery

After a slow recovery in 2020, Minnesota employment saw steady growth in 2021. But the state’s labor market is still in flux, according to a variety of measures from the Minneapolis Fed’s Regional Economic Indicators dashboard.

Assessing the overall health of the Minnesota labor market is a matter of perspective. The sluggish job growth in 2020 was likely due to public health restrictions on business operations and a drop in consumer demand for services, which impacted the state’s large service sector. These factors contributed to the notable drop in employment toward the end of 2020, when a surge of COVID-19 cases hit the Ninth District (Chart 1).

Job growth was steadier and moderate overall in 2021. As of February 2022, 70 percent of the employment lost at the onset of the pandemic has been recovered and unemployment is the lowest it has been in the state since the 1990s.

Despite these recent gains, employment in Minnesota remains 4 percent below pre-pandemic levels, or about 120,000 workers. Minnesota is not alone; among district states, only Montana and South Dakota have breached the waterline of pre-pandemic employment.

Industries struggle to recover

These subdued employment levels are impacting almost every sector in Minnesota, but some sectors are hurting more than others.

For example, Minnesota’s largest sector—education and health services—lost around 57,000 workers at the beginning of the pandemic. Since then, the sector has been struggling to regain that level of employment and is still short about 21,000 workers.

Also severely impacted was the leisure and hospitality industry, the state’s sixth largest sector, which lost roughly 150,000 of its nearly 280,000 jobs between February and April 2020. As of February 2022, employment in leisure and hospitality remains about 12 percent below pre-pandemic levels, making the industry one of the hardest hit in the state.

Industries have been eager to recover lost workers over the last year, evident by the thousands of job openings in nearly every sector across the state (Chart 2). However, many of these positions have sat vacant, and a large share are among leisure and hospitality subsectors, like accommodation, food, the arts, and recreation, according to the Minnesota Department of Employment and Economic Development.

These affected industries and subsectors also have some of the lowest-paying jobs in the state. This is likely one of the reasons that employment in low-wage jobs has barely grown in Minnesota while employment in middle- and high-wage jobs fully recovered by the middle of 2021.

To work or not to work

One of the main reasons that employment has not snapped back is simply that there are fewer people in Minnesota’s labor force than there were before the pandemic began.

Though Minnesota still has one of the nation’s highest labor force participation rates, the rate has fallen steeply during the pandemic and remained mostly flat through 2021 (Chart 3). As of January 2022, the state has about 100,000 fewer workers in the labor force than it did before the pandemic began.

Contributing to the low labor force participation rate is stagnant population growth in Minnesota. The February 2022 Budget and Economic Forecast found that Minnesota’s population only grew by about 225 people in 2021, whereas it had grown by an average of about 40,000 people per year in the previous decade. Increased mortality during the pandemic, low birth rates, and a decline in migration to the state are all factors for this decrease in growth, the report said.

In addition to slowing population growth, a myriad of other factors are also influencing labor force participation, including child care availability, fear of COVID-19, long-term illness, and more retirements during the pandemic.

With unemployment low and job postings high, Minnesota has some of the main ingredients for strong future job growth. But until labor force participation rebounds or population growth returns, the state is likely to see only modest employment growth, and those sectors that have been hit the hardest will probably continue to face a slow recovery throughout 2022.